Financial Statements

Welcome back. In this lesson of the accounting basics, we're going to be taking a look at the three key financial statements.

So first off, we have the balance sheet. Now, as the name implies, the balance sheet requires that there is a balance between the company's assets on one side and that equals the liabilities and equity for that company. So those two things, liabilities and equity will equal assets, that's referred to as the accounting equation, which we will be going into in further detail in later videos. But for now, just understand one way to easily look at this is that assets is everything that the company owns equals liabilities and equity, which is everything that the company owes. So that is the balance sheet.

The balance sheet is basically a snapshot. It's a moment in time. You can think of it literally like a photo. Maybe it's as of yesterday. Maybe it's as of the last day of the year. But it's simply showing you a picture of what the assets, liabilities, and equity for that company was at that moment in time now. The balance sheet has a lot of key information on it, but looking at the balance sheet alone does not tell you the financial health of the company. You have to look at these other financial statements to get a full picture of what is occurring with that company.

The next thing we have is the income statement. Now, an income statement is always going to be over a period of time, it's not a moment. It's going to be usually a quarter or a month or very commonly a year. And in that time period, the income statement, which is also referred to as the profit and loss statement or the P&L, that's going to show you kind of like the financial performance in that time period of the company. So you're going to see everything that the company made. So again, it's over a time period as opposed to the balance sheet, which is just at a single moment in time.

Then you have the cash flow statement. Now, the cash flow statement, as the name implies, shows all the cash that's flowing into the company and out of the company in a period of time. So one reason that's particularly important is even if the income statement is showing that a company is highly profitable, that might not be cash actually flowing in, it might be sales made that won't have the actual cash coming in from those sales for a period of time. And in the meantime, there might be debts coming up that can't be paid because there's no cash on hand. And if the company is not properly managing its cash flow, it can go bankrupt regardless of the fact that it is operating profitably in a period of time.

These three statements together give you an actual view of what is occurring with the financial health of a company. So first off, let's take a look at a balance sheet. So here we are in Netsuite. Let's go over to reports down to financial and you'll see we've got balance sheet right here. So if we click on that, we're going to see the balance sheet for this organization. So let's just simplify this. Let's just bring it down to the fact that we have we have assets on one side, right? So we have current assets and fixed assets and it gives our total and then we have liabilities right here and then we have equity. So these numbers notice they equal over $2 million and that balances with the assets amount of $2 million. And if you click on these buttons, you'll see they break down into all the various accounts.

One additional thing to note is that down here we see what the data is that's being shown to us. So in this case, it's showing us the balance sheet. As of today, we can change that to any day in the past, but it will be a specific day for the balance sheet. So we're going to be going into more detail on every single one of these financial statements. But I'd like to just give you just a basic example of something you could look for on a balance sheet that would be revelatory about what's happening with that company. So let's say you were looking at this company's balance sheet. One thing you can take a look at is going down to the liabilities. You could look at regardless of how much sales the company has, you could simply look at that and go, okay, well, how much debt does this company have? What are the accounts payable? What are the sometimes would be listed as loans or debts payable? What is that number? If you see that that number is massive, especially in relation to the sales of the company, you might have a serious problem on your hand. So you can immediately look at that number and go, great, that's telling you something about that organization.

Okay, So now let's take a look at an income statement. So we're going to go up here to reports back down to financials. And this time we're going to go over to income statement at the top there. So we have this income statement. So in this case, you're going to see we've got income at the top here. So it's got all these various forms of income. And then at the bottom, it's got all the expenses for the organization. And if you go all the way to the bottom, you'll see net income, in other words, the profit of the company. So if it's in the black, right, it's made a profit. If you see parentheses or if it's minus or also known as in the red, that means the company during that time period. And you'll see at the bottom here, this is over the period of last year. If it's in the minus, then that company lost more money than it earned during that time period of a year.

So let's take a look now at the cash flow statement. So we go back to reports, we go down to financial and then we'll click here on cash flow statement. So what we're looking at here, the way the cash flow statement is broken down, is you're going to see that it's broken into three basic categories. There's operating activities, there's investing activities, and then there's financing activities. So operating activities means all the cash that flowed in and out of something related to either operating like selling product, making the product, anything regarding production or services would be operating activities. Then you have investing activities. So those are instances, again, where there is either an inflow or an outflow where the company is investing in something, especially long term, things like property, massive equipment, things that will have long term value. So the company might be expending cash to purchase, things that will have long term value like assets. So that's the investing activities.

And then lastly, we have financing activities. So that's any inflow or outflow of cash where people are either investing in the company, for example, there might be an angel investor that's giving $5 million to the company, so they're flowing cash into the organization. Or for example, the company is paying out dividends to its stockholders. So that's money out from the company to its owners. So those would be financing activities where it's cash flowing out of the company. So all of these three things are separately segmented and then kind of added together. So at the bottom, you'll see this net change in cash for the period. So if it's a positive number, that means out of these three different areas, there was more cash that flowed into the organization during that period than flowed out. And of course, if it's negative, the opposite occurred. The organization lost more cash. And again, that doesn't necessarily mean it wasn't profitable, but in terms of actual cash or cash equivalents, right things that could be cash in a very short amount of time. There was more cash that went out of the organization than went in during that time period.

So that's the cash flow statement. So you can kind of see how you do want to take a look at all three of these things because you can have high profits, but no cash and you might have problems paying your bills or for example, even if your balance sheet is showing that you have huge debts, if you know you've got a massive influx of cash coming in and you're fully able to pay off the debts that are showing on your balance sheet, there might not be a problem. So you have to look at all three of these financial statements to really get a concept of how is this company doing from a financial health standpoint.

So that's the basics of the three key financial statements. In the future, lessons we're going to be going into depth on every single one of these. So I'll see you in the next videos.

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